What counts as income for tax credits?

Updated on 23 October 2018

The amount and type of income you (and your partner, in a joint claim) have will affect how much tax credits you might get. The rules are the same whether you are claiming child tax credit (CTC), working tax credit (WTC), or both. This page tells you what counts as income for tax credits.

The Government is gradually introducing universal credit, a new benefit which will eventually replace tax credits, and some other social security benefits. Universal credit is being introduced geographically and in areas where the full (digital) service is available, it may no longer be possible to make a new claim for tax credits. Existing tax credit claimants are expected to be moved across to universal credit between 2019 and 2023. You can find out more about this in our universal credit section.

 

The four steps

The legislation, like a set of do-it-yourself carpentry instructions, prescribes a series of four steps to work out tax credit income. The form does not require this, but we set out the steps below in order to give a complete picture.

1. Add together:

  • pension income
  • investment income
  • property income
  • foreign income
  • notional income.

If the total is £300 or less, ignore it. If it is more than £300, subtract the first £300. Note that there is no notional capital rule as for social security benefits – only the income from savings is counted.

2. Add together:

  • employment income
  • social security income
  • student income
  • miscellaneous income.

3. Add together the amounts in Step 1 and Step 2.

4. Add trading income to – or if there is a loss subtract trading loss from – the total in Step 3.

Then deduct:

  • bank conversion charges or commission
  • gross gift aid, payroll giving or give as you earn donations made in current year
  • gross pension contributions.

The rest of this page gives some basic information about income and tax credits. You can find more detailed information about each category of income on our website for advisers.

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What does annual income mean?

Tax credits are worked out using yearly rates, so you need to provide an annual income figure. HM Revenue & Customs use the tax year as the basis for their calculations so any annual income figures you have to provide should, therefore, be the same, that is from 6 April one year to 5 April the next year.

Even if your claim ended part way through the year, or started part way through the year, HMRC still need you to provide your annual income for the tax year.

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Where can I find my annual income figure?

If you are an employee, the end of tax year statement you get from your employer (a P60) should give you the information you need for your tax credit claim. The figure you need is the gross income amount, before tax and National Insurance.

If you get benefits from the Department for Work and Pensions (DWP), you should get a statement of taxable benefits at the end of the tax year.

If you are self-employed, you should normally use the business profits (or loss) figure from your self assessment tax return.

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Do I include maintenance payments?

Any maintenance payments you get, whether for a child or yourself, are ignored.

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Do I include statutory payments while I am off work?

Statutory sick pay is counted in full as earnings.

Statutory maternity, paternity, shared parental leave and adoption pay is also counted as earnings, but only the amount over £100 a week is taken into account.

Do I include payments I get for fostering or looking after children?

Qualifying care receipts paid by local authorities and similar agencies are only taken into account in working out tax credit income to the extent that they are taxable. Therefore, if you use the simplified method for working out your profits for income tax self-assessment, your income from caring for tax credits purposes will be the amount on which you pay income tax. If your care receipts are wholly covered by your tax-exempt amounts, then none of your income from caring is counted in assessing your tax credits entitlement.

Also, if you use the standard method, your caring income for tax credits will be the same as your taxable profits after deductions. You can find out more about taxable income for foster carers and shared lives carers in our Disabled people and carers section

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Do I include benefits?

Taxable state benefits should be included as social security income. However, income-based Jobseekers Allowance although taxable is not counted as income for tax credit purposes. Carers Allowance Supplement – available to those living in Scotland only – is also taxable but is not counted as income for tax credit purposes. Not all benefits are taxable; see our page on State Benefits for more information.

Important: the rules on what counts as income can be quite complex, so check the notes that come with your tax credits claim form. If you are still not sure what to include, ring the Tax Credit Helpline.

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Changes to property income

From 6 April 2017, there were changes to how property income is calculated for tax purposes for residential landlords. The change basically means that there will be a restriction on how much you can deduct as expenses for finance costs including mortgage interest. By 2020, no expense deduction will be allowed for finance costs and instead you will need to claim a tax relief instead. See GOV.UK for more information.

However, for tax credits, you will need to continue to calculate your income as you did before 6 April 2017. This means that you can deduct finance costs as an expense when working out your profit for tax credit purposes only. Whilst this is better for tax credit claimants, it does mean that you will need to work out a figure for tax credits that is different to the figure you will need to put on your tax return as your taxable property income.

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In-year finalisation

If you have claimed tax credits and then claim universal credit in the same tax year, your tax credits award will stop and HMRC will finalise your award in-year (ie before the end of the tax year). If this happens, HMRC will write to you and explain what you need to do. It is important to note that the income figures you provide will be for the shortened award period and not for the full tax year. You can read more about this in our stopping tax credits section.

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More information

This page gives an overview of what counts as income for tax credits. For more detailed information, visit the following pages on our website for advisers.

Tax Credits: What is income?

Understanding self-employment

Understanding the disregards

Stopping tax credits

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